The End of the Handshake Deal: Coronavirus’ Impact on Office Leasing

This global pandemic, which has wiped out the stock market and is pushing the US into a recession, will not only turn the tables in most office markets nationally, but I think it will leave an indelible mark on how companies use and lease office space once this crisis is over.  Once we have this one under control, I am sure everyone will have in mind the future risk of another pandemic.  Below is a brief outline of how I think things will change beyond avoiding handshakes.

For over 10 years, we’ve seen mainstream companies adopt the open office workspace that is commonly seen in the technology world. Financially, open floor plans don’t require such a large footprint and thus companies can save on rent expenses.  In addition, open space fosters more collaboration, but now the trade-off of having an unhealthy workspace emerges.  At this time, it is unclear how the pandemic will impact the trend; at the very least, it will now be incumbent upon employees to exercise good health practices more diligently, e.g., sanitizing work areas, covering coughs, washing hands thoroughly, etc.

There’s been a growing movement away from the open office concept, as I wrote about last year – Is the Open Office Plan Dead?  We’re seeing the pendulum swing back toward more private space and it’s possible this pandemic may accelerate that swing, given the associated health risks as discussed recently in the Wall Street Journal – Your Open-Floor Office Could Help Spread Coronavirus.  Businesses already committed to open floor plans will likely stay the course and implement more stringent guidelines for maintaining a healthy workplace.  Further, given the tough economic times businesses will be facing, they will be under pressure to minimize their costs and may lean toward more open spaces while striking a sanitary balance.

  1. Accelerated move away from dense open office and desk sharing in this new era of “social distancing”. As stated in the WSJ article, a 2014 Stockholm University study found that open-plan offices lead to a higher rate of employee illness. It also found that employees who used unassigned desks had a higher sickness rate.  While an open office environment promotes visibility among employees, it also fosters a dynamic where employees are very conscious of their appearance to others, leading some to avoid taking time off for illness.  Of course, a sick colleague does no one any good.A healthy workspace is nothing new.  Back in 2014, I posted a blog about the WELL Building Standard, (created by International WELL Building Institute (IWBI)), which is an independent certification of the healthiness of a workspace.  IWBI recently announced that they’ve established a task force to take on COVID-19 where they are going to be hosting a series of webcasts.
  1. Move away from Co-Working. As I wrote in my blog, Is Co-Working the Right Choice for Your Business? Office Space Alternatives for Tenants Today  the co-working business model is based upon creating densely populated office space. In that post, I cite an example where I had recently reviewed a co-working facility for a client, where a single office of 150 square feet (which is a typical size for 1 person) was designed for 5 people.  As stated in the WSJ article, WeWork purposefully narrowed corridors to encourage more physical interaction. The health risks associated with open office spaces are amplified in co-working when sharing space with complete strangers from various companies; whereas, an individual company can establish policies to enforce among its employees to ensure sanitization of workspaces.Co-workers are also sharing the highly touted amenities from kitchens to conference facilities.  These common areas and shared amenities are a hotbed for germs, as noted in the WSJ article citing a 2017 study in Arizona.  As they noted, the coffee break room had more germs than the restrooms.The economic downturn that we’re experiencing coupled with the fact that co-working users have short-term agreements (typically 1 year or less), I’d expect that we’re going to see a spike in vacancy among coworking companies.  The highly leveraged ones we’ll likely be gone which will lead to greater pressure on building owners that may be overexposed to coworking companies in their portfolio.  In fact, Forbes recently reported the coronavirus may be the final straw for WeWork;  – Coronavirus May Kill WeWork
  1. More companies may see that remote work is viable. Companies that were reluctant to allow employees with positions that allow them to work remotely to do so, may now see that it is viable, particularly as many of us are leveraging great technology tools like Microsoft Teams, Zoom Meetings and to  name a few.  As a result, we may see tenants re-think their office space requirements and incorporate remote work where possible.  On the other hand, as I write this post under statewide ordered lockdown, I can also envision that many of us (particularly those with younger children where parents are also dealing with online school) will look forward to returning to an office.
  1. Suburban office markets may get a boost. Employees who live in the suburbs, will be able to avoid public transportation, which may weaken demand for urban office space. Time will tell if this notion has any merit, but we have been seeing an uptick in suburban office space demand as older millennials move to the suburbs to raise their families for better schools and quality of life reasons.
  1. Greater focus on building cleaning services. An often-overlooked provision in the lease regarding building services is the delivery of janitorial services to the office suite as well as common areas.  In negotiating leases for our tenant clients, I always recommend that we have the landlord provide their cleaning specifications attached to the lease as an exhibit.  Now, greater attention must be given to the scope and frequency of janitorial services, particularly to these shared areas.  Instead of janitorial service just being in the evening, perhaps we will see a service that includes cleaning during the day as well.  Of course, that will result in an increase in building operating costs.
  1. Greater focus on building HVAC systems. Microbes are circulated through the air we breathe in our offices and we are dependent upon the HVAC system to filter out contaminants.  This is particularly the case as most office buildings do not have operable windows. The leading organization on air quality, ASHRAE (American Society of Heating, Refrigerating and Air-Conditioning Engineers) has developed proactive guidance on how to help address COVID-19: Coronavirus (COVID-19) Response Resources from ASHRAE and Others
  1. Lease issues to consider. In addition to building cleaning services and HVAC, the following are some issues to consider.  Overall, as we’re all in this together, landlords and tenants should communicate regularly about this ever-changing pandemic.
    • Force Majeure – if stated in a lease, excuses a party from performance under the lease for events beyond its reasonable control, i.e., Acts of God, war, labor strikes, etc. In the future, parties should address pandemics.   Landlords can rely upon Force Majeure for its delay in construction, delivering services, etc.  It is important to note that “Force Majeure” typically does not excuse a party’s performance which can be completed by payment of money.  For example, if a tenant does not have money to pay its rent, they typically cannot claim they’re excused from doing so by Force Majeure.
    • Building Closures – if a facility is mission-critical to a business and must be accessed 24/7, tenants should carefully review the landlord’s right to close the building. Is it limited to only when mandated by law?
    • Building Amenity Centers – while most landlords are reluctant to be very specific in the lease about the building amenities (i.e., conference center, tenant lounge, fitness center) so as to give them flexibility, as a result of the pandemic, landlords were closing-off amenity centers which some tenants relied upon for conference rooms, etc. Going forward, tenants should try to clarify the right of the landlord to close building amenities.  Also, as noted above, there should be some stated standards for the cleaning of these facilities.
    • Notice of Exposure – both landlord and tenant may require of the other, notification if they become aware of potential exposure to COVID-19 or another pandemic virus. Of course, there are privacy concerns that should be considered.  This will be an area ripe for litigation, e.g., a tenant’s employee becomes ill alleging that he/she was infected at their office or building.
    • Tenant’s Rent Abatement Rights – sophisticated tenants will have rent abatement rights if they cannot access their space and/or services are not delivered after a certain time period. That right, however, is typically excluded if the interruption is due to Force Majeure as noted above.
    • Vacating Premises as Default – a relic of retail leases, some office leases state that the tenant is in default if they vacate or do not occupy the Premises which is what we are seeing, as most of us are working remotely from home. Tenants should delete such language when negotiating their lease, if it’s not deleted, then it should be specifically excused due to Force Majeure.
    • Compliance with Laws – while tenants are generally required to comply with applicable laws, landlords may also be obligated to comply with laws to close the building, common areas, etc.
    • Insurance – tenants and landlords will need to consult with their risk managers in light of this and any future pandemics. For example, where tenants and landlords are required to carry business interruption insurance, will it cover a Pandemic?
    • Alterations – tenants, to “de-densify” their space, may look to reconstruct portions of their floor plan. Such provisions typically require landlord’s consent to make alterations, which cannot be unreasonably withheld.
    • Lease Flexibility – tenants will pay greater attention to build as much flexibility as possible into their lease to address these unforeseen circumstances, e.g., options to terminate, contract or reduce space.

A closing thank you to my friend and client, Joe Shannon, of the personal injury law firm, Shannon Law Group, for his suggestion for the title of this blog. Also, many thanks to Joe Pasquinelli of the architecture and interiors firm, ARCHIDEAS, for his valuable input.

Don Wenig
Blackacre Advisors LLC

DISCLAIMER.   Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).

Call Now Button